As shares plunge again, one Fool is itching to buy a bit of a bank.
Before the credit crunch shook world markets in August 2007, financial shares made up a large proportion of my portfolio.
However, from 2005 onwards, I repeatedly warned readers of a brewing 'financial hurricane', caused by unsustainable booms in house prices and reckless lending. As increasingly more signs of the coming hurricane emerged, such as the huge losses on US subprime mortgages racked up by HSBC (LSE: HSBA), I became increasingly anxious.
By the end of 2007, I had liquidated pretty much my entire holding of financial firms. Out went HBOS and Lloyds TSB -- now combined as Lloyds Banking Group (LSE: LLOY) -- Royal Bank of Scotland (LSE: RBS), Legal & General (LSE: LGEN), Royal SunAlliance (LSE: RSA) and others. After this clear-out, I was left with no exposure to banks and insurers, but plenty of cash.
In hindsight, this sell-off proved to be one of the best financial decisions of my life. More by luck than judgement, I sold off these shares at close to peak prices. More importantly, I sold before some went on to record brutal losses of 95%+.
Biased against banks
Since my 2007 sell-off, I haven't bought even a single share in any bank -- not one in four years.
Frankly, the evidence of reckless behaviour which emerged between 2007 and 2009 put me right off buying bank shares. The £1.3 trillion banking bailout by taxpayers also coloured my judgement, too. Why take the risk of buying into businesses that were so obviously terribly run?
Today, I remain pessimistic about the UK housing market and expect further weakness in house prices. Likewise, I expect consumer and corporate demand for credit to remain weak until at least 2014. Neither trend will help bank profits to grow.
Big, big falls
However, the recent slump in bank shares prices has caught my eye, leaving me wondering if now is a good time to dip a toe back in the banking water.
Here's how the shares of major banks have performed in the last two months, before the latest round of financial turbulence began (ranked from highest to lowest falls):
|Barclays (LSE: BARC)||240p||139p||-42%|
|Royal Bank of Scotland||37p||22p||-40%|
|Lloyds Banking Group||47p||33p||-30%|
Source: Yahoo Finance UK
I have excluded Standard Chartered (LSE: STAN) from my table, because it does little business here in the UK.
As you can see, mega-bank HSBC has been a relative safe haven. The two state-supported banks, Lloyds and RBS, are down significantly but Barclays, with its heavy exposure to investment banking via Barclays Capital, is down a whopping 42%. Barclays shares fell almost 10% yesterday, when the FTSE 100 fell 4.7%. Ouch.
Of the four banks listed above, HSBC is by far the safest and strongest, but is likely to be the most boring in terms of share-price escalation.
Of the remaining three, I cannot bring myself to buy Lloyds (41% taxpayer-owned) and RBS (83% taxpayer-owned), as they don't pay dividends. Also, I fear that meddling politicians could interfere with these two banks anew.
Thus, I'm left with Barclays as the bank to run my rule over. Here are the latest forecasts for its fundamentals, based on yesterday's closing price of 139p:
|Market value||£17 billion|
Source: Digital Look
If this were any company other than a bank, I'd seize on these fundamentals as a strong argument to buy its shares.
What's more, capitalised at a mere £17 billion, Barclays today is now a tiddler when compared with its global peers. Hence, it would be a cheap prize for a well-capitalised foreign bank to snap up. The way things are right now, 300p a share would probably tempt big shareholders to sell.
All things must pass
In short, barring another financial Apocalypse on par with the aftermath of the bankruptcy of Lehman Brothers in September 2008, Barclays looks like a (nervous) buy to me.
Sure, buying Barclays now may mean enduring months of roller-coaster turbulence as shares jump and slump in response to economic news from the UK, US and Europe. Even so, I reckon there is a big disconnect between Barclays' future prospects and its current share price.
Brave, bold buyers of Barclays today could well prove to be tomorrow's big winners!
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